Prediction Markets Face Regulatory Crackdown

The core of the regulatory battle centers on whether prediction markets are financial instruments or a form of gambling. The Commodity Futures Trading Commission (CFTC) currently oversees platforms that are registered as Designated Contract Markets (DCMs), such as Kalshi. This classification treats their offerings as "event contracts" or swaps, which fall under federal jurisdiction. A key conflict is the clash between federal and state authority. More than a dozen states argue that prediction markets, especially those on sports, are essentially gambling and should be subject to state-level gaming regulations and taxes. This has led to numerous lawsuits, with courts delivering conflicting rulings on whether federal law preempts state attempts to regulate these platforms. The issue may ultimately need to be resolved by the Supreme Court. Recent enforcement actions highlight the regulatory complexities. In January 2022, the CFTC fined Polymarket $1.4 million and ordered it to cease and desist offering unregistered swaps. More recently, the CFTC has signaled it will increase its scrutiny of all prediction markets to police for insider trading and market manipulation, reinforcing its authority even over regulated exchanges like Kalshi. The formation of new advocacy groups adds political pressure from both sides. Mick Mulvaney, a former Trump White House chief of staff, now leads "Gambling Is Not Investing," a coalition arguing that sports-related contracts are a loophole to bypass state gaming laws. This group joins other conservative voices and the American Gaming Association in pushing for tighter, gambling-style regulation. In response to state-level challenges and criticism, the CFTC under the Trump administration has become more supportive of prediction markets. New Chairman Michael Selig has emphasized the agency's "exclusive jurisdiction" over these markets and has indicated a shift away from previous proposals that would have limited contracts on political and sporting events. This stance has drawn criticism from figures like Utah Governor Spencer Cox, who vows to fight the federal position in court. The debate also involves a distinction between different types of prediction markets. While sports-related contracts are a major flashpoint, platforms have offered markets on a wide array of topics, from economic data to the Oscars. However, the CFTC has previously rejected contracts related to U.S. elections, citing public interest concerns and prohibitions on gaming. Polymarket, after its 2022 settlement, blocked U.S. customers but resumed operations in the country in December 2025 following the end of DOJ and CFTC investigations. The company acquired a CFTC-licensed exchange to ensure compliance and brought on Donald Trump Jr. as an advisor. The increased regulatory focus has prompted calls for platforms to strengthen their internal compliance programs. The CFTC has made it clear that while exchanges like Kalshi have their own surveillance and disciplinary processes, the federal agency retains the ultimate authority to investigate and prosecute illegal trading practices.